Mumbai: Reserve Bank Governor D Subbarao today said it is possible that subsidised agricultural credit is being diverted for other purposes and suggested modification of the scheme.
"Anecdotal evidence suggests that some agricultural loans, contracted at a sub-market rate of interest because of the subvention, are being diverted for non-agricultural purposes.
"This evidently defeats the objective of the subvention scheme and needs to be corrected either by remodelling the subvention scheme or through tighter monitoring of the end use of agricultural loans", he said.
Subbarao was speaking at a function here to mark the 30th foundation day of the National Bank for Agriculture and Rural Development (Nabard).
The RBI governor said he observed the trend during his recent visits to some bank branches in different parts of the country.
Therefore, there is a need to modify the interest subvention scheme under which the government subsidises interest cost for an agricultual loan and tighten the end-use factors while granting the credit, he said.
Due to interest subvention, farmers pay an interest of only four percent per annum. Meanwhile, Subbarao also suggested a discussion on the very idea of subsidising agricultural credit. The jump in banks' non-performing assets (NPAs) due to a migration to system-driven NPAs came under criticism from the Governor, saying the RBI doesn't understand what bankers mean by it. "I dont know what that means. There seems to be some new technology for system wide identification," he said.